“We’re one percent of the (climate change) problem. We have to get other states and other nations on a similar path forward, and that is enormously difficult because it requires different jurisdictions and different political values to unite around this one challenge of making a sustainable future out of our currently unsustainable path.”

What can economics tell us about this critical collective action problem? As is often the case with economics, we’ll need at least two hands to answer this question.

On the one hand, implementing a regional policy to combat climate change in a state that accounts for only one percent of the problem seems futile. Pick up any resource economics textbook and you will find a dismal (even by economists’ standards) tale of the tragedy of the commons. The basic story goes something like this. A group of individuals share a limited resource (an ocean, a pasture, an aquifer, a planet). With everyone acting independently to maximize their own immediate gain, they end up depleting the resource, even though everyone can see that it is not in anyone’s long-term interest to do so.

Years ago, the standard economic narrative was that all commons problems inevitably end in this kind of ecological disaster. And if this is true, regional climate change mitigation policies in California, Europe, and elsewhere will be unavailing. Any fossil fuels we refrain from burning will just get burned somewhere else.

How’s that for dismal?

On the other hand, there are some clear counter examples. There are plenty of cases where large groups of people with competing interests have managed to find a way to manage a shared and finite resource sustainably. Elinor Ostrom collected and analyzed these cases in meticulous detail, beginning with her dissertation work on groundwater management in Los Angeles.

In 2009, Elinor Ostrom was awarded the Nobel Prize in Economic Sciences for her research that challenged the view that individuals cannot overcome the commons dilemmas they face. Drawing from extensive field work, creative laboratory experiments, and game theoretic modeling, she worked to understand how groups of individuals can cooperate to organize sustainable, long-term use of common pool resources.

The woman was brilliant. But if you are looking for a silver bullet in Ostrom’s work, you won’t find it. If there is a unifying theme, it’s that there is no panacea.

Ostrom did look for broader institutional regularities in the success stories she studied. One of these: governance structures built from the bottom up. Smaller units can develop ideas, establish norms and make rules informed by local knowledge, culture, and circumstance. As larger units become involved, larger governance structures can leverage momentum and take advantage of the trial and error learning that has been going on at a smaller scale. This may sound like hippie-talk. I am from Berkeley, after all. But Ostrom has the data to back this up.

In an earlier blog post, Severin argued that the primary goal of California climate policy should be to develop the technologies that can facilitate low-carbon economic growth. He’s right. But policy innovation is an important complement to technology innovation. California can serve as an important lynchpin in the emerging “polycentric” system of policies designed to decouple economic growth and increasing atmospheric concentrations of greenhouse gases.

A recent World Bank report notes that regional, national, and sub-national carbon pricing initiatives are proliferating. More than 40 national and 20 sub-national jurisdictions have now adopted some form of carbon pricing (either a tax or an emissions trading program). The map below (taken from the report) shows existing and planned carbon pricing programs. Together these countries account for 22 percent of global emissions. When you add the regions that have established plans to implement programs, this share increases to almost 50 percent.

It is impossible to precisely quantify the extent to which California is helping to accelerate the diffusion of these policies and programs. But there is plenty of anecdotal evidence that California’s experience is serving to support and advance these collective actions. Take China, for example. Last year, California’s Governor Brown and China’s top climate change negotiator signed a Memorandum of Understanding which included pledges to work together on sharing low-carbon strategies and creating joint-ventures on clean technologies. China is currently establishing and implementing pilot cap-and-trade programs in seven of its provinces and cities covering 250 million people.

Economic theory tells us that, if we assume all users of a scarce resource act to maximize their own narrowly defined self interest, they will inevitably meet with tragic ends. Work by Elinor Ostrom and others have shown that, if we use more nuanced models that allow for more complex motivational structures (such as trust, cooperation, optimism, a will to lead), solutions to the commons problem are complex, hard won, but not impossible.

Global climate change is the most challenging collective action problem we have ever faced. Individual states cannot tackle the problem on their own. But state-level actions can move us towards a more global solution. In the words of Elinor Ostrom:

“While we cannot solve all aspects of this (climate change) problem by cumulatively taking action at local levels, we can make a difference, and we should.”

2 Responses to Chumps or champs? California leads on climate

Meredith – nicely said. I would add that even with “only” 1% of the problem, California can help lead by example. The state has done that in the past (not only good examples, mind you, but nevermind that). Arguably the energy example (think the “Rosenfeld energy use curve”) is a relevant case in point. We’d be ‘chumps’ for not trying (our kids and grandkids would probably have a worse word than that if we didn’t).

There is another aspect to the challenge. A lot of the economic commentary around these issues starts from the premise that we have (relatively) frictionless and competitive markets. But the evidence of the past decade strongly suggests (I would argue proves, but I’m probably not rigorous enough in using that term) that some energy markets depart from perfection so dramatically that they actually follow different rules.

In effect, relative prices of various fuels and energy sources have varied so widely over the last decade that we can treat them as models of how shadow carbon prices would work in the real world. The increase in the global price of oil since 2004 amounts to a shadow carbon price of $230/ton. Asian LNG has had an oil indexed price increase equivalent to $180/ton. Yet in neither market is there evidence of dramatic shifts in consumer response — oil still has pretty much both the market share and the market size it did when it cost $30, and the same is true of Asian LNG. (Yes, there has been some shift towards efficiency in the oil market, but not much — the elasticities are too low.) And this is true even though oil first hit $100 before the Great Recession, so there has been time for a market response.

On the other hand, in the US utilities market very small relative factors shifts in the price of coal and natural gas — with shadow carbon price weights under $30.ton — have produced quite substantial and very short term swings in market share. Why the difference? Because in the US utility market there is effectively frictionless factor substitution, with coal or gas plants on the same grid dispatching by the hour based on price. But in transportation — effectively oil’s major remaining market — there are few examples of fuel substitutability except Brazilian light duty vehicles where, indeed, market share is volatile with price.

So a core problem in most energy markets is that most customers have no short term capacity to shift fuels, whatever happens to price. And their medium range capacity is limited by an effective petroleum monopoly on the sector in most countries. But a state like California, while far too small to change global carbon output, is not too small to create competitive opportunities, as a long history of clean energy innovations suggests.

So California can help inject competition into energy markets, and its LCFS and ZEV mandates are likely to do that.